Tax audit under section 44AB of Income Tax Act, 1961

Background of introducing tax audit

Section 44AB has been introduced in the Income tax Act, 1961, by the Finance Act, 1984. Since the main purpose of introduction of tax audit was to ensure the accuracy of books of accounts maintained, which forms the basis of computation of income of the assessee, the onerous responsibility was casted on chartered accountants in reporting thereof.

Who is required to get the accounts audited: -

• Every person, carrying on business, if his total sales, turnover or gross receipts, in business exceed Rs. 1 Cr. in any previous year; or
• Every person, carrying on profession, if his gross receipts, in profession exceed Rs. 50 Lakh in any previous year; or
• Every person, carrying on business referred to in section 44AE, 44BB, 44BBB, and he has claimed his income to be lower than the profits or gains so deemed under those sections, in any previous year; or
• Every person, carrying on the profession referred to in section 44ADA and he has claimed his income lower than the profits and gains so deemed under that section and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year; or
• Every person, carrying on the business, if the provisions of section 44AD(4) are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year.

Cases where tax audit of account is not required: -

• A person, who declares profits and gains in accordance with the provisions of section 44AD(1) and his total sales, turnover or gross receipts, as the case may be, in the business does not exceed Rs. 2 Cr. in such previous year;
• A person, who derives income of the nature referred to in section 44B (Profits and gains of shipping business in case of non-residents) or section 44BBA (Profits and gains of the business of operation of aircraft in case of non-residents).

Important points while calculating turnover: -

• Discount allowed in the sale invoice to be deducted from the turnover;
• Turnover discount is in the nature of trade discount and should be deducted from the turnover even if same is allowed by separate credit note;
• Sales return should be deducted even if returns are from sale made in earlier years;
• Sale proceeds of fixed assets or property held as investment property or shares, securities etc held as investment will not form part of turnover;
• In case of speculative transactions, the aggregate of both positive and negative differences is to be considered as turnover;
• If excise duty or GST recovered credited separately to excise duty or GST account, they would not be included in the turnover;

• The following receipts would be covered by the term “gross receipts in business”
• Cash assistance received or receivable against exports;
• Any duty repaid or repayable as drawback against exports;
• Commission, brokerage, service and other incidental charges received in the business of chit fund;
• Liquidated damages;
• Insurance claims - except for fixed assets;
• Sale proceeds of scrap, wastage etc whether or not credited to miscellaneous income account;
• Advance received and forfeited from customers.

• The following receipts would not be covered by the term “gross receipts in business”
• Rental income unless the same is assessable as business income;
• Dividends on shares except in the case of an assessee dealing in shares;
• Income by way of interest unless assessable as business income;
• Share of profit of a partner of a firm;
• Write back of amounts payable to creditors and/or provisions for expenses no longer required.

• In case of profession, gross receipts will not include out of pocket expenses if collected separately either in advance or otherwise. If, however, such expenses are not specifically collected but are included in consolidated fee, the whole of the amount shall form part of gross receipts;
• Where the assessee carries on more than one business activity, the results of all business activities should be clubbed together.

Activities to be treated as business: -

• Advertising agent;
• Clearing, forwarding and shipping agents;
• Couriers;
• Insurance agent;
• Nursing home;
• Travel agent.

Form of report: -

• Form 3CA and 3CD where accounts of an assessee is required to be audited under any other law;
• Form 3CB and 3CD where accounts of an assessee is not required to be audited under any other law.

Other important points: -

• A person carrying on business, whose –
• aggregate of all amounts received during the previous year, in cash, does not exceed 5% of the said amount; and
• aggregate of all payments made, in cash, during the previous year does not exceed 5% of the said payment,

shall be required to get the accounts audited if his total sales, turnover or gross receipts exceeds Rs. 10 Cr.

• Due date of furnishing tax audit report is one month prior to the due date of ITR i.e. 30th September of Assessment Year. However, for Financial Year 2020-21 the due date is 31st October, 2021.

• In a case where a person is required by or under any other law to get his accounts audited, it shall be sufficient compliance of this section if such person get his accounts audited under such law by the specified date and furnishes by that date the report of such audit and a further report in the form prescribed under this section. The defaulters of tax audit will be penalized u/s 271B and will be liable to pay penalty at the rate of 0.50% of the turnover or gross receipts, subject to maximum of Rs. 1,50,000/-.